Mark J. Morrison
President and Chief Executive Officer
Hallmark Financial Services, Inc.,
(817) 348-1600
FORT WORTH, Texas - August 9, 2007 - Hallmark Financial Services, Inc. (Nasdaq: HALL) today reported quarterly net income of $8.8 million for the second quarter ended June 30, 2007 as compared to a net loss of $2.8 million reported for the second quarter of 2006. On a diluted basis, net income per share was $0.42 for the three months ended June 30, 2007 as compared to a net loss of $0.18 per share for the same period in 2006. During the quarter ended June 30, 2007, Hallmark reported total revenues of $68.7 million, representing a 46% increase over the $47.2 million in total revenues for the second quarter of 2006.
Mark J. Morrison, President and Chief Executive Officer, said, "We are very pleased to report that the second quarter of 2007 represented the highest quarterly revenues and profit in the Company's history. The increase in revenue for the quarter was primarily the result of the continued execution of our plan to increase the retention of the business we produce which, in turn, had the intended result of increasing our bottom line. Even with the general softening market conditions across the property & casualty industry, our overall production growth and policy rates in the quarter and year-to-date have been in line with our expectations. For the six months ended June 30, 2007, gross premiums produced by our operating units have collectively grown by 9.6% over the same period last year. This growth is largely a result of our strategy of controlled geographic expansion into states where business is less price sensitive and where we feel we can achieve adequate pricing for our policies. Our underwriting margins continue to be strong in each of our operating units as we have maintained favorable policy retention levels without the need to give significant rate concessions."
Mark E. Schwarz, Executive Chairman of Hallmark, stated, "Profitable underwriting continues to be our focus and is reflected in a combined ratio of 86.9% year-to-date and an annualized return on average equity of 18%. Year- over-year growth in book value per share was 22% at quarter end."
Three Months Ended Six Months Ended
June 30, June 30,
2007 2006 2007 2006
($ in thousands) ($ in thousands)
Gross premiums written $66,577 $47,876 $131,235 $95,611
Net premiums written 62,296 45,392 123,067 91,171
Net premiums earned 55,310 34,259 106,958 62,693
Commission and fee income 8,159 10,016 16,064 22,280
Investment income, net of expenses 3,047 2,236 6,037 4,593
Realized gain (loss) 828 (1,283) 881 (1,366)
Total revenues 68,736 47,187 132,694 91,707
Net income (loss) 8,815 (2,842) 13,785 (416)
Common EPS - basic $0.42 $(0.18) $0.66 $(0.03)
Common EPS - diluted $0.42 $(0.18) $0.66 $(0.03)
Annualized return on average equity 22.0% -10.9% 17.5% -0.8%
Book value per share $7.91 $6.47 $7.91 $6.47
Cash flow from operations $25,619 $20,091 $44,594 $29,673
The increase in net income for both the quarter and year-to-date was largely due to the improved results of the Specialty Commercial Segment and additional investment income from a larger investment portfolio, in both cases primarily as the result of increased retention of premiums. In addition, the first half of 2006 was adversely impacted by $9.6 million of interest expense from amortization attributable to the deemed discount on convertible promissory notes issued in January, 2006 and subsequently converted to common stock during the second quarter of 2006. These increases in net income were partially offset by lower results from the Standard Commercial and Personal Segments during the second quarter and year-to-date 2007.
Increased retention of business produced by the Specialty Commercial Segment and increased production by the Personal Segment were the primary causes of the increase in revenue. Specialty Commercial Segment revenues increased $15.8 million and $28.0 million, or 92% and 84%, during the three months and six months ended June 30, 2007, respectively, as compared to the same periods of 2006. Revenues from the Personal Segment increased $2.8 million and $5.8 million, or 24% and 25%, during the three and six months ended June 30, 2007, respectively, due largely to geographic expansion into new states. The retention of business produced by the Standard Commercial Segment that was previously retained by third parties was the primary reason for that segment's $0.7 million and $5.0 million increase in revenue for the three months and six months ended June 30, 2007, respectively. Realized gains of $0.8 million and $0.9 million for the three months and six months ended June 30, 2007, respectively, as compared to realized losses of $1.4 million recognized for both the same periods the prior year, were the primary reason for the increase in revenue for Corporate.
Net investment income for the three months ended June 30, 2007 was $3.0 million as compared to $2.2 million for the same period in 2006. Net investment income for the six months ended June 30, 2007 was $6.0 million as compared to $4.6 million for the same period in 2006. The increase reflected higher interest rates and greater average cash and invested assets attributable to increased retention of premiums, positive cash flow from operations and reinvestment of strong earnings for the past four quarters. Hallmark has no exposure in its investment portfolio to sub-prime mortgages and less than $5 thousand total exposure in mortgage backed securities.
Hallmark's net losses and loss adjustment expenses and its net loss ratio for the three months ended June 30, 2007 were $30.7 million and 55.5%, respectively, compared to $20.2 million and 59.0%, respectively, for the same period in 2006. Hallmark's net losses and loss adjustment expenses and its net loss ratio for the six months ended June 30, 2007 were $62.9 million and 58.8%, respectively, compared to $36.9 million and 58.8%, respectively, for the same period in 2006. Hallmark recognized $1.9 million of favorable development on prior years' loss reserve estimates during the second quarter of 2007 as compared to $0.9 million of favorable development recognized during the same period in 2006. Hallmark recognized $2.1 million of favorable development on prior years' loss reserve estimates during the first six months of 2007 as compared to $0.8 million of favorable development recognized during the same period in 2006. Hallmark's other operating costs and expenses and its expense ratio for the three months ended June 30, 2007 were $23.7 million and 27.9%, respectively, compared to $20.0 million and 26.8%, respectively, for the same period in 2006. Hallmark's other operating costs and expenses and its expense ratio for the six months ended June 30, 2007 were $46.4 million and 28.1%, respectively, compared to $41.1 million and 27.7%, respectively, for the same period in 2006.
Hallmark Financial Services, Inc. is an insurance holding company which, through its subsidiaries, engages in the sale of property/casualty insurance products to businesses and individuals. Our business involves marketing, distributing, underwriting and servicing commercial insurance in Texas, New Mexico, Idaho, Oregon, Montana, Louisiana, Oklahoma, Arkansas and Washington; marketing, distributing, underwriting and servicing non-standard personal automobile insurance in Texas, New Mexico, Arizona, Oklahoma, Arkansas, Louisiana, Idaho, Oregon, Montana, Missouri and Washington; marketing, distributing, underwriting and servicing general aviation insurance in 47 states; and providing other insurance related services. The Company is headquartered in Fort Worth, Texas and its common stock is presently listed on NASDAQ under the symbol "HALL."
Forward-looking statements in this Release are made pursuant to the "safe harbor" provisions of the Private Securities Litigation Act of 1995. Investors are cautioned that actual results may differ substantially from such forward- looking statements. Forward-looking statements involve risks and uncertainties including, but not limited to, continued acceptance of the Company's products and services in the marketplace, competitive factors, interest rate trends, the availability of financing, underwriting loss experience and other risks detailed from time to time in the Company's periodic report filings with the Securities and Exchange Commission. For further information, please contact: Mark J. Morrison, President and Chief Executive Officer at 817.348.1600 http://www.hallmarkgrp.com
Hallmark Financial Services, Inc. and Subsidiaries
Consolidated Balance Sheets
($ in thousands)
June 30 December 31
ASSETS 2007 2006
(unaudited) (audited)
Investments:
Debt securities, available-for-sale,
at market value $160,547 $133,030
Equity securities, available-for-sale,
at market value 30,192 4,580
Short-term investments, available-for-sale,
at market value 64,086 25,275
Total investments 254,825 162,885
Cash and cash equivalents 41,792 81,474
Restricted cash and cash equivalents 10,042 24,569
Premiums receivable 54,569 44,644
Accounts receivable 12,441 13,223
Prepaid reinsurance premium 1,773 1,629
Reinsurance recoverable 6,505 5,930
Deferred policy acquisition costs 20,214 17,145
Excess of cost over fair value of net
assets acquired 31,427 31,427
Intangible assets 24,927 26,074
Prepaid expenses 1,187 1,769
Other assets 10,639 5,184
Total assets $470,341 $415,953
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes payable $35,130 $35,763
Structured settlements 9,794 24,587
Unpaid losses and loss adjustment
expenses 104,388 77,564
Unearned premiums 107,859 91,606
Unearned revenue 3,777 5,734
Reinsurance balances payable 1,271 1,060
Accrued agent profit sharing 1,256 1,784
Accrued ceding commission payable 7,059 3,956
Pension liability 2,895 3,126
Deferred federal income taxes 1,225 2,310
Current federal income tax payable 4,652 2,132
Accounts payable and other accrued
expenses 26,768 15,600
Total liabilities 306,074 265,222
Commitments and Contingencies
Stockholders' equity:
Common stock, $.18 par value
(authorized 33,333,333 shares
in 2007 and 2006; issued 20,776,080
shares in 2007 and 2006) 3,740 3,740
Additional paid in capital 118,085 117,932
Retained earnings 45,265 31,480
Accumulated other comprehensive loss (2,746) (2,344)
Treasury stock, at cost (7,828 shares
in 2007 and 2006) (77) (77)
Total stockholders' equity 164,267 150,731
$470,341 $415,953
Hallmark Financial Services, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
($ in thousands, except per share amounts)
Three Months Ended Six Months Ended
June 30 June 30
2007 2006 2007 2006
Gross premiums written $66,577 $47,876 $131,235 $95,611
Ceded premiums written (4,281) (2,484) (8,168) (4,440)
Net premiums written 62,296 45,392 123,067 91,171
Change in unearned
premiums (6,986) (11,133) (16,109) (28,478)
Net premiums earned 55,310 34,259 106,958 62,693
Investment income,
net of expenses 3,047 2,236 6,037 4,593
Realized gain (loss) 828 (1,283) 881 (1,366)
Finance charges 1,185 1,216 2,271 1,903
Commission and fees 8,159 10,016 16,064 22,280
Processing and service
fees 203 727 475 1,584
Other income 4 16 8 20
Total revenues 68,736 47,187 132,694 91,707
Losses and loss
adjustment expenses 30,712 20,199 62,897 36,889
Other operating
expenses 23,723 20,027 46,424 41,053
Interest expense 796 1,662 1,582 3,247
Interest expense from
amortization of
discount on
convertible notes - 8,508 - 9,625
Amortization of
intangible asset 573 573 1,146 1,146
Total expenses 55,804 50,969 112,049 91,960
Income (loss)
before tax 12,932 (3,782) 20,645 (253)
Income tax expense
(benefit) 4,117 (940) 6,860 163
Net income (loss) $8,815 $(2,842) $13,785 $(416)
Common stockholders
net income (loss)
per share:
Basic $0.42 $(0.18) $0.66 $(0.03)
Diluted $0.42 $(0.18) $0.66 $(0.03)
Hallmark Financial Services, Inc.
Consolidated Segment Data
Three Months Ended June 30, 2007
Standard Specialty
Commercial Commercial Personal
Segment Segment Segment Corporate Consolidated
Produced premium 24,751 40,956 13,298 - 79,005
Gross premiums
written 24,740 28,540 13,297 - 66,577
Ceded premiums
written (2,804) (1,477) - - (4,281)
Net premiums
written 21,936 27,063 13,297 - 62,296
Change in
unearned
premiums (1,731) (5,474) 219 - (6,986)
Net premiums
earned 20,205 21,589 13,516 - 55,310
Total revenues 20,003 32,978 14,696 1,059 68,736
Losses and
loss adjustment
expenses 11,267 10,635 8,813 (3) 30,712
Pre-tax income
(loss) 2,664 9,441 2,176 (1,349) 12,932
Net loss
ratio (1) 55.8% 49.3% 65.2% 55.5%
Net expense
ratio (1) 27.0% 32.0% 22.8% 27.9%
Net combined
ratio (1) 82.8% 81.3% 88.0% 83.4%
Three Months Ended June 30, 2006
Standard Specialty
Commercial Commercial Personal
Segment Segment Segment Corporate Consolidated
Produced
premium 23,488 35,285 10,739 - 69,512
Gross premiums
written 23,453 13,684 10,739 - 47,876
Ceded premiums
written (2,067) (417) - - (2,484)
Net premiums
written 21,386 13,267 10,739 - 45,392
Change in
unearned
premiums (4,532) (6,258) (343) - (11,133)
Net premiums
earned 16,854 7,009 10,396 - 34,259
Total revenues 19,264 17,146 11,890 (1,113) 47,187
Losses and loss
adjustment
expenses 10,018 3,707 6,482 (8) 20,199
Pre-tax income
(loss) 2,773 3,439 2,393 (12,387) (3,782)
Net loss
ratio (1) 59.4% 52.9% 62.4% 59.0%
Net expense
ratio (1) 28.9% 22.4% 26.2% 26.8%
Net combined
ratio (1) 88.3% 75.3% 88.6% 85.8%
(1) Net loss ratio is calculated as total net losses and loss adjustment
expenses divided by net premiums earned, each determined in
accordance with GAAP. Net expense ratio is calculated as total
underwriting expenses of our insurance company subsidiaries,
including allocated overhead expenses and offset by agency fee
income, divided by net premiums earned, each determined in accordance
with GAAP. Net combined ratio is calculated as the sum of the net
loss ratio and the net expense ratio.
Hallmark Financial Services, Inc.
Consolidated Segment Data
Six Months Ended June 30, 2007
Standard Specialty
Commercial Commercial Personal
Segment Segment Segment Corporate Consolidated
Produced
premium 48,301 80,313 28,374 - 156,988
Gross premiums
written 48,221 54,641 28,373 - 131,235
Ceded premiums
written (5,439) (2,729) - - (8,168)
Net premiums
written 42,782 51,912 28,373 - 123,067
Change in
unearned
premiums (2,655) (11,230) (2,224) (16,109)
Net premiums
earned 40,127 40,682 26,149 - 106,958
Total revenues 41,770 61,076 28,469 1,379 132,694
Losses and loss
adjustment
expenses 24,108 21,716 17,080 (7) 62,897
Pre-tax income
(loss) 5,423 14,127 4,294 (3,199) 20,645
Net loss
ratio (1) 60.1% 53.4% 65.3% 58.8%
Net expense
ratio (1) 27.5% 31.8% 23.2% 28.1%
Net combined
ratio (1) 87.6% 85.2% 88.5% 86.9%
Six Months Ended June 30, 2006
Standard Specialty
Commercial Commercial Personal
Segment Segment Segment Corporate Consolidated
Produced
premium 47,152 74,290 21,838 - 143,280
Gross premiums
written 46,917 26,856 21,838 - 95,611
Ceded premiums
written (3,852) (588) - - (4,440)
Net premiums
written 43,065 26,268 21,838 - 91,171
Change in
unearned
premiums (11,899) (14,880) (1,699) - (28,478)
Net premiums
earned 31,166 11,388 20,139 - 62,693
Total revenues 36,804 33,114 22,687 (898) 91,707
Losses and loss
adjustment
expenses 17,818 6,519 12,568 (16) 36,889
Pre-tax income
(loss) 6,133 5,058 4,444 (15,888) (253)
Net loss
ratio (1) 57.2% 57.3% 62.4% 58.8%
Net expense
ratio (1) 29.8% 24.3% 26.4% 27.7%
Net combined
ratio (1) 87.0% 81.6% 88.8% 86.5%
(1) Net loss ratio is calculated as total net losses and loss adjustment
expenses divided by net premiums earned, each determined in
accordance with GAAP. Net expense ratio is calculated as total
underwriting expenses of our insurance company subsidiaries,
including allocated overhead expenses and offset by agency fee
income, divided by net premiums earned, each determined in accordance
with GAAP. Net combined ratio is calculated as the sum of the net
loss ratio and the net expense ratio.
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